Japan's Fiscal Year Winds Down, With Less Anxiety

By KEN BELSON

Published: February 20, 2003

TOKYO, Feb. 19—
Few events here stir up as much anxiety as the closing of the books at the end of the Japanese fiscal year on March 31.

In late February and March in just about every year for the last decade, the country has been seized with worries about the fiscal year-end touching off a vicious cycle: The wobbly state of the big banks' balance sheets depresses stock prices, which -- because the banks count part of their huge stockholdings in their capital at year-end -- makes their balance sheets weaker still, which depresses stock prices more, and around and around until the whole financial system melts down.

But there are growing signs that this year will be different.

In past years, the government has generally responded by cobbling together a handful of regulatory and fiscal measures meant to give the impression of progress on the country's many economic and financial problems. Investors would take the bait and bid stocks up a bit just in time, and another day of reckoning would come and go uneventfully.

But this year, the banks are in such bad shape that it is already clear that a blip up in the market will not be enough. They are having to embrace painful steps that they took only reluctantly before: writing off bad debts, selling stockholdings and raising new capital.

They are also attacking their costs by cutting more jobs and closing more branches. They have even concluded deals with Goldman Sachs, Merrill Lynch and other foreign firms to bring in fresh cash and new technology -- a sign that the banks recognize that they are running out of options.

''This year, what is different is the banks, not just the government, are making an effort,'' said Rieko McCarthy, a credit analyst at J. P. Morgan Securities. ''The banks are out of economic capital and available acrobatic accounting to get out of trouble.''

The flurry of activity has damped fears that one or more of the big banks would collapse before March 31. It has also provided some political cover for Heizo Takenaka, the chief financial regulator. Last October, lawmakers rebuffed his frontal assault on the problem of the banks' nonperforming loans, forcing him to tone down his aggressive plan to clean up the financial industry.

Since mid-December, when investor pessimism was at its deepest, share prices of the big banks have risen nearly 4 percent, in line with the gains registered by the broader stock market.

Crises are in part about perception, and Japanese bank woes are no exception. This year, headlines made far from Japan, notably the Iraq situation, are occupying the minds of many investors who might otherwise be focused on the end of the fiscal year. There is also a noticeable level of crisis fatigue: Investors want to see some lasting results.

''At least the direction the banks are going in is correct,'' said Nana Otsuki, a credit analyst at Standard & Poor's in Tokyo. ''The problem is the next step, and whether they can implement their strategies.''

Those strategies depend on a lot of help from the state. While the government of Junichiro Koizumi has scolded and threatened the banks, it is also forming a publicly financed agency to overhaul major debtor companies, a job the banks have failed to do themselves. Though details are sketchy so far, the Industrial Revitalization Corporation may be given 10 trillion yen ($84 billion) to work with.

For its part, the central bank, the Bank of Japan, agreed to spend 2 trillion yen buying stockholdings from commercial banks to help them make their investment portfolios less risky. Only about one-quarter of that has been spent so far, so the central bank still has ample scope to help banks that are unwilling or unable to dump shares on the market as March 31 nears.

Even so, vexing problems will still face the banks come April 1. The country shows no signs of escaping the grip of deflation, which makes it steadily harder for borrowers to repay their debts. If policy makers do not find a way to halt the four-year decline in prices, nonperforming bank loans may continue to pile up faster than the banks can write them off.

The banks' deals to raise fresh capital have come with strings attached. Selling new common stock -- like Mitsubishi Tokyo Financial's planned 400 billion yen issue -- can shore up the bank's capital adequacy ratios, but it also dilutes the value of existing shares, scaring off potential investors.

UFJ Holdings, Mizuho Holdings and the Sumitomo Mitsui Financial Group have tried to sidestep that problem by planning issues of new preferred shares instead. But finding buyers will not be easy in sour markets, and investors are upset about Sumitomo Mitsui's issue anyway, because the planned preferred shares are convertible into common stock. Sumitomo Mitsui's stock price fell 3.5 percent today.